These example sentences are selected automatically from various online news sources to reflect current usage of the word 'insolvency.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

The first known use of insolvency was
in 1660

Financial Definition of insolvency

What It Is

In most usages, insolvency is the inability of a company or individual to meet its financial obligations as they come due. In the legal sense of the word, an entity is considered insolvent if its total liabilities exceed its total assets.

How It Works

Entities most commonly become insolvent by taking on too much debt. For example, a company with a heavy debt load may find itself unable to cover its debt liabilities should its business slow.

In this case, the company must raise capital to pay its obligations via selling assets, borrowing, or somehow raising capital and/or reducing expenses.

If a company cannot meet its obligations, it may be forced to file for bankruptcy.

Why It Matters

Insolvency in public companies may continue to trade while restoring their financial health, but represent some of the riskiest investments on the market. Insolvency is a red flag for investors since it can lead to bankruptcy or the evation of assets in order to meet debt payments.